Cairn said it was in talks about exploration in the southern area of Rajasthan, and the company made six new discoveries in the area last year.

Its biggest discovery in Rajasthan is the southern Mangala field, which is estimated to hold 1.07 billion barrels.

"We are delighted to have secured this extension in Rajasthan, which allows us to continue to carry out a comprehensive evaluation prior to agreeing a long term development area," chief executive Bill Gammell said in a statement.

Mike Watts, Cairn's director of exploration and new business, said that while the company was very optimistic about its South-Asian business, there were always risks attached to drilling for oil.

The company's shares lost 18% in one day last year after investors were disappointed by drilling results from fields to the north of Rajasthan.

Mr Watts said that Cairn has had its finds assessed by independent auditors and pointed to the fact that the company has had a one in three success rate when drilling for oil in the region.

He continued that this was probably the last chance Cairn would have to extend its contract and the firm was looking to sign more long-term development agreements that would run until 2041.

Cairn shares climbed 1.7% to 1,322 pence during early trading in London.